Flash : What is your super power again?
Batman : I'm rich.
Being at the mercy of debt and being squeezed on pricing can be devastating to a new company that is getting up on its feet, and its not something that Galaxy is ever likely to risk again. Not willingly.
Anthony Tse was brought in to be the financial fix-it man and he did an excellent job of rebuilding Galaxy's operation and staff.
He sold Jiangsu at a profit, brought in GMM, got OCP finance, made Mt Cattlin profitable, took over GMM, repaid OCP with BNP finance, further optimised Mt Cattlin, did the POSCO deal at SDV - and then, having filled the coffers, walked the plank so that Mr Hay would have a clean slate. Poor bugger walked right into a trade war.
But we know all this.
Why don't the newer miners? Why did they waste so much time before addressing operational problems?
If some of the newer hard rock operations have made a mistake, it is not to follow Galaxy's path back to profit a little more closely.
A little too much hubris on the part of the new miners about the quality of their product, and over-estimating their recovery rates and under-estimating their cost of production meant that they failed to prioritise removal of impurities first and do more to bring down their costs and improve margin.
The first thing that Galaxy did was to get their product as free of mica contamination as possible.
What this did for GXY was to boost production (mica dust was responsible for a lot of wasted time at the plant).
Then, as soon as it was making cash AT negotiated with a tier one bank, BNP Paribas, and paid off OCP.
What they didn't do was a stack load of drilling to make bubble charts look good.
As the others mines spent their money on wasteful drilling campaigns logos and name-changes, Galaxy was paying off debt, completing Yield Optimisation and getting itself ready for the lithium winter that is now blowing through the cracks in our neighbour's walls.
A40, PLS and AJM still have debt facilities with high interest "lenders of last recourse".
I haven't read their debt covenant contracts but it is typical that they will take possession of the company. Not good.
Galaxy may have skirted very close to being technically insolvent at some point back there between 2013 and 2016 with a moth-balled Mt Cattlin, as many of the long term holders would remember and the ultimate reason was the combination of expansion and debt while the markets were being rocked.
I've always had mixed feelings about pursuing the path towards another hard rock converter and have spent many hours arguing here with
@Thesi about the same issue.
I'm not opposed to taking over another hard rock miner but there had better be some intensive due dilligence because we don't need any boat anchors.
I'd prefer to see Galaxy now focus on brine, with the lithium chemicals coming first from SDV and then more from James Bay, which suits a co-located processor, rather than bog the company down in a perpetual WA-China relationship.
It is clear as day that the US needs lithium supply - and having to deal with China to get it may not be at all preferable or economical.
Brine First is the old Plan A for Galaxy, as far as I've understood it.
It's possible that Simon Hay has now formed a different view, after his World Tour
and he now definitely has to weigh up whatever possibilities present themselves with WA hard rock companies facing a debt squeeze.
However, if we are going to go vertical with Mt Cattlin I'd prefer a more arm's length arrangement with Chinese conversion - tolling and profit sharing contracts, rather than outright ownership or building of Chinese mainland assets.
Building locally in Australia doesn't seem to be the best bang for the buck either. At double (and a bit more) the cost of Chinese conversion and a higher operating cost, the cost advantage from shipping savings may not be the most cost effective next step.
It's like when you run a company. Your first employee is a major step.
If they're not productive and a boost to the bottom line, then it can cost you your entire company.
Vertical integration can be a massive bottleneck for a small company.
Mt Cattlin is operating really well. We don't want that to get potentially choked by a random operational or administrative issue in China when we could potentially rent capacity rather than own. If something goes wrong at the converter then - you switch back to Plan A without any sunk costs in the plant.
I realise now that all this interaction with converters is more complex than when I first started thinking about it.
A miner's spodumene product needs to be carefully qualified with individual converters.
You can't run tolling on an ad-hoc basis. Neither can it happen over night. It is potentially 6 months time lag before you can be sure you have a match of operations. I think this is one of the reasons why some of Anthony Tse's thought bubbles have taken longer to eventuate.
The courtship of a converter relationship is long.
Similarly, a plant that is tuned to A40 ore won't necessarily be ready to take Galaxy ore this year.
Finding a new client and converter won't necessarily mean that A40 will be off and running soon either.
If they are dealing with new Japanese or Korean spodumene conversion assets, then they will have to go down the road of sending samples and then the converters test etc etc.
Simon Moore's recent report says the fastest process is slightly more than 6 months.
That is a long time on the share market and even longer when there are debt alarm bells ringing.
We are all naturally impatient but this is a chemical business, not a resource sector.
Galaxy is fortunate to have multiple clients and reasonably long-standing healthy relationships with its clientele.
At least one of the Galaxy clients now has doubled their capacity. Shipment sizes have increased by 50% for the last 2 ships.
There are at least a few reasons to breathe easier than we were in Q1-2.
Resource investors are conditioned to looking at the spot market for guidance in many minerals like iron ore, nickel etc.
Problem with the spot market and lithium is what you are selling then you are already Desperate & Dateless and the converter is likely not going to be able to process your ore into battery grade. That is why spot market doesn't work for a high spec chemical product that needs low contamination if its going to make it into a gigafactory's supply chain.
This period has definitely sucked.
It sucks to be trolled by your own government not understanding what an EV actually is, failing to support with lower taxes or invest in infrastructure, or to support local spodumene sector by co-investing in a local battery sector or even Australian EV manufacture.
It sucks to see good people who have invested wisely and conscientiously in a good company that is kicking goals and making money getting smashed.
It sucks that the sector has been misunderstood and misrepresented so badly by the media.
It sucks that the sector is mislabelled as purely a resource sector. Lithium is NOT iron ore.
It sucks that the change of Chinese subsidies period has been misunderstood as withdrawal of support when the net result will be more focused on safer and longer ranged batteries, more efficient investment, better vehicles and faster development of the Chinese market and faster deployment of vehicles that will sell internationally.
It sucks that the bottleneck at Chinese conversion capacity has been mislabelled as over-supply as the converters race to retool to meet a higher spec and do so at a higher capacity. They will have no shortage of willing clients once they have a product that meets gigafactory spec.
It sucks that people short renewable stocks.
It sucks that global trade and the stock market has been the victim of such petulant and childish policy making from the most powerful men on the planet.
But here we are. That list is just a big whinge and it all about the past.
We make our decisions about what is likely to happen in the future.
We've survived. Galaxy is even stronger now in comparison to its peers as it retains its ability to produce profitably.
I've also come this far and I'm going to see things through.
The last item on my list will not be - it sucks that I sat through the dark days and then sold at the bottom and watched the whole thing take off again.
As random and vicious as this last period has been I am still confident that things are about to turn around.
2020 remains my estimate for a tipping point in broad public and government acceptance and the financial markets finally accepting that this new sector has the tech to beat oil. The arrival of the first parity priced vehicles. The improvement of infrastructure, range, integration and technology.
2019 set all the ground work : the change of policies at Tier One banks to prefer renewable over fossil fuel projects, the opening of China to international EV factories, Germany's willingness to compete with China and Tesla, Tesla's relentless expansion in scale and quality, the growing list of battery factories under construction.
Dozens of other small and huge news items around lithium. Those stick out most to me.
Now we simply wait for the gigafactories to open, one after the other and the quality of the new vehicles and batteries to sell themselves.
Galaxy has paid the price for perceived indecision but, right now, I don't know what Galaxy should have done differently.
6 months of Trading Halt?
Everyone has been smashed by a market with the jitters and with no regard to fundamentals.
What will eventually become obvious is that the companies that have done the right things, made careful deals, packed away enough nuts to survive the winter will come out the other end.
What we don't need to do now is to chase every wounded competitor.
In a short period of time, A40 could be joined by 1 or 2 more in a similar or worse predicament.
Which one would present a better target/JV? Perhaps none of them....
A China trade deal now seems much more probable that a week ago.
The 2 players in this game have ratcheted up the pain level until they both blinked.
The Dow tonight is happy again with the news of more China trade talks.
This time perhaps China has a few things they'd be willing to put on the table.
At the very least, I can't see that China won't offer up a new willingness to respect IP. That is my guess as a possible Chinese olive branch.
It will give Trump something to mount in a trophy case.
Much can be made of it as a tactical victory, but the policing of it is a different matter.
They have already allowed international auto companies to operate without sharing their IP, and they have had ample time to acquire as much as they like. It can't be such a big deal to say that they will acknowledge copyright protection and promise to cut back on their cyber industrial sabotage division a little.
Trump : "I think we're going to make a deal".Please do. It's worth a massive correction to our share price.
Thanks.
